WorldStage Newsonline – While the weekend removal of subsidy on fuel in Nigeria is seen as a bold signal of the authorities’ reformist intentions, an analyst at Standard Chartered Bank believed that the overall impact on inflation would likely to be severe.

Razia Khan, Regional Head of Research, Africa for Global Research, Standard Chartered Bank, wrote that inflation, though unchanged at 10.5 per cent y/y in November with domestic food prices offsetting the cost of higher imports, it will clearly be impacted now – as higher transport costs feed into all facets of economic activity in Nigeria (food currently makes up 50.7 per cent of the CPI basket, housing and utilities 16.7 per cent and transport 6.5 per cent).

“With little in the way of precedent for a wholesale lifting of the fuel subsidy – previously-attempted price increases were more modest – the overall impact on inflation is likely to be severe,” she said.

With a backdrop of recent FX market pressure, and still-elevated government spending, she said the risk of secondary price increases was substantial, even given the contractionary impact of higher fuel prices on disposable incomes.

“The CBN are likely to maintain a tight monetary policy, perhaps even front-loading further policy tightening, should inflation accelerate far beyond Nigeria’s single-digit target for a sustained period of time.

“Although bond yields may remain pressured near-tem, the Nigerian naira (NGN) is likely to benefit from greater transparency in the balance of payments, lower import demand and – it is hoped – faster FX reserves accumulation.”

The Federal Government had projected a savings of N1.2 trillion or $7.5 billion annually from the subsidy removal.

Story by Ebenezer Ademola (ebeademola@gmail.com)